TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 3+ TICKS HIGHER AT 108-15+
T-notes meander ahead of CPI. At settlement, , 2-year -2.3bps at 4.220%, 3-year -2.3bps at 4.288%, 5-year -2.1bps at 4.389%, 7-year -2.2bps at 4.532%, 10-year -2.1bps at 4.684%, 20-year -2.0bps at 5.242%, 30-year -1.5bps at 5.235%.
THE DAY: Treasuries saw modest gains on Tuesday despite a further rise in oil prices, with participants largely looking ahead to Wednesday's US CPI report. A hotter-than-expected core CPI print would likely revive expectations for a September rate hike, particularly given recent hawkish Fed commentary and renewed upside in energy prices. Conversely, another soft core reading would strengthen the case for patience following the deterioration in payrolls and could see markets more decisively price out a September move.
Oil prices advanced following several incidents around the Bab al-Mandab Strait, Gulf of Oman and southern Red Sea, keeping energy-driven inflation concerns elevated. However, gains were capped after Pakistan's Defence Minister suggested the US and Iran are close to reaching some form of agreement, providing some optimism around the geopolitical backdrop.
Fed speak had little impact on price action. Goolsbee said labour market indicators point to stability rather than strong performance, but stressed that inflation remains the Fed's biggest problem. Meanwhile, Atlanta Fed interim President Venable said inflation remains too high, while describing the labour market as broadly stable.
Economic data also had little impact with attention firmly on Wednesday's CPI report. Existing Home Sales declined, while household debt fell by USD 13bln in Q2 to USD 18.8tln.
The 3-year auction was stronger than average, but not as strong as the previous - also resulting in little reaction.
Overall, Tuesday's modest Treasury gains despite firmer crude suggest positioning ahead of CPI was the dominant influence on rates. The inflation report will be particularly important for the front end, with September currently finely balanced between a hold and a hike.
SUPPLY
Notes/Bonds
- US sold USD 48bln of 3-yr notes.
- US to sell USD 42bln of 10yr notes on 12th August, and USD 25bln of 30yr on August 13th; all settling on August 17th
Bills
- US sold 6-week bills at a high rate of 3.670%, B/C 2.93x
- US to sell USD 72bln of 17-wk bills on August 12th; to sell USD 110bln of 4-wk bills and USD 100bln 8-wk bills on August 13th; all to settle August 18th
STIRS / OPERATIONS
- Fed Hike Pricing via CME Fed Watch: Sept 12.5bps (prev. 12.9bps), Dec 29.5bps (prev 31.6bps).
- EFFR at 3.63% (prev. 3.63%), volumes at USD 108bln (prev. USD 117bln) on August 10th
- SOFR at 3.63% (prev. 3.62%), volumes at USD 2.964tln (prev. USD 2.977tln) on August 10th
- NY Fed RRP op demand at 1.250bln (prev. 0.975bln) across 2 counterparties (prev. 2) on August 11th
A session where the curve rallies modestly into a major CPI print despite firmer crude follows a familiar pre-data script: ranges compress, secondary inputs get shrugged off, and the dominant flow is positioning rather than information. The note that single-official Fed commentary and middling data moved nothing is itself the tell, since in the days immediately before a binary inflation release only the release itself tends to clear the market's information threshold. The structurally interesting feature is the setup: September priced as a genuine coin flip between hold and hike means the front end carries the full burden of the reaction, and in past episodes where the near meeting sat finely balanced, the 2-year has done the work while the long end moved in sympathy but with less conviction. The parallel pressure from oil, with supply-route incidents around Bab al-Mandab and the Gulf of Oman feeding the inflation worry even as rumours of a US-Iran understanding capped it, is the kind of two-sided energy tape that has historically left rates trading the data rather than the headline risk. Supply has been absorbed without drama, a solid if unspectacular 3-year stopping through, with the 10-year and 30-year auctions now sitting as the next tests of demand at these levels. What matters next is the composition of the CPI print rather than the headline: a hot core has tended to reprice the September meeting quickly given the hawkish Fed chatter already on record, while a soft core read on the back of weaker payrolls has historically been the trigger for decisively pricing the hike out.